Simpson Manufacturing Co., Inc.
Q4 2018 Earnings Call Transcript

Published: 5 Feb 2019

[Operator:]

Greetings and welcome to the Simpson Manufacturing Company's Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Madeleine Myers, Investor Relations. Please go ahead.

[Madeleine Myers:]

Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's fourth quarter and full year 2018 earnings conference call. On this call, the company may discuss forward-looking statements such as future plans and events. Forward-looking statements, like any prediction of future events, are subject to factors, which may vary and actual results may differ materially from these statements. Some of these factors and cautionary statements are discussed in the company's public filings and reports, which are available on the SEC or the company's corporate website. Please note that the company's earnings press release was issued today at approximately 4

[Karen Colonias:]

Thanks, Madeleine, and good afternoon, everyone. 2018 was a year of solid operational execution at Simpson. We achieved consolidated full year net sales of approximately $1.1 billion, an increase of 10% from $997 million in 2017, due to increases in both sales volumes and average unit prices. This, combined with our focus on cost cutting initiatives, resulted in our full year of 2018 operating income of $176.2 million, increased 28% compared to the prior-year period. Net income increased by 40% to $129.5 million and we produced strong earnings of $2.78 per diluted share, an increase of 43% year-over-year. Throughout 2018, we repurchased $111.1 million of our common stock, a record for Simpson, reflecting our continued confidence in the strength and outlook for our business. These results represent solid progress towards our key financial targets under the 2020 Plan, which we announced in the third quarter of 2017, with the goal of maximizing operating efficiencies and driving long-term shareholder value. Today I'm pleased to confirm, we remain focused on achieving these aggressive targets. These include

[Brian Magstadt:]

Thank you, Karen, and good afternoon, everyone. I'm pleased to discuss our fourth quarter financial results with you today. Our consolidated net sales for the fourth quarter of 2018 were $241.8 million, up 4% compared to $231.7 million in the fourth quarter of 2017. Within the North America segment, net sales increased 7% year-over-year to $204.7 million, primarily due to increases in average net sales unit prices. In Europe, net sales decreased 9% year-over-year to $34.9 million. Europe net sales were impacted by reduced sales volumes in our concrete business as we experienced strong demand for asphalt paving products in 2017 that did not repeat in the fourth quarter of 2018 at the same level. Europe net sales were also negatively affected by approximately $1.3 million in foreign currency translations, primarily related to the weakening of local currencies against the United States dollar. Wood construction products represented 84% of total net sales in the fourth quarter of 2018 flat compared to the fourth quarter of 2017. Concrete construction products represented 16% of total net sales in the fourth quarter of 2018. Our fourth quarter consolidated gross profit decreased approximately 3% or $3.5 million to $98.4 million from $101.9 million in the fourth quarter of 2017 resulting in a consolidated gross profit margin of 40.7%. As Karen highlighted the year-over-year decline was primarily due to increased factory and overhead costs on lower production, higher material costs, including higher priced steel and higher labor costs resulting from tightening labor market conditions. On a per segment basis our gross profit margin in North America was 42.3% compared to 46.2% in the prior year quarter. In Europe, our fourth quarter gross profit margin was 31.7% compared to 34% in the year-ago period. Our Europe gross margins were pressured by a year over decrease in concrete sales, which in Europe have higher margins than wood. From a product perspective, our fourth quarter gross profit margin on wood products was 41.3% compared to 43.8% in the prior year quarter and was 31.4% for concrete products compared to 35.9% in the prior year quarter. Now turning to our fourth quarter costs and operating expenses. As part of our ongoing efforts to improve our cost structure, consolidated research and development and engineering expenses for the fourth quarter declined 19% year-over-year to $10.2 million, primarily due to decreased personnel costs and severance expenses. Consolidated selling expenses for the quarter decreased 9% year-over-year to $26.3 million, primarily due to the decreases in personnel and advertising costs, which were partially offset by increases in sales commissions and depreciation expense. On a segment basis compared to the prior year quarter, selling expenses in North America were flat and in Europe they declined by 35%. General and administrative expenses in the fourth quarter increased 14% year-over-year to $41.3 million, primarily due to higher professional and consulting fees associated with the SAP project and management consultants, as well as increased IT-related costs. These were partly offset by decreases in severance expense and personnel costs. On a segment level, general and administrative expenses in the North America segment increased by $3 million compared to the prior year quarter. In Europe, G&A increased by slightly less than $0.5 million year-over-year. We remain committed to reducing our total operating expense dollars as a percentage of net sales. For the fourth quarter of 2018, total operating expenses as a percentage of net sales were 32%, down 130 basis points from the prior year quarter. Our consolidated income from operations for the fourth quarter decreased 7% year-over-year to $22.7 million compared to $24.4 million in the fourth quarter of 2017. In North America, income from operations decreased 14% year-over-year to $18.9 million. In Europe, loss from operations was $8.8 million compared to a loss of $3.3 million in the prior-year period, primarily due to a $6.7 million goodwill impairment charge. Excluding the goodwill impairment, Europe's loss from operations would have been approximately $2.1 million. As a result, our operating income margin of 9% on a consolidated basis declined by approximately 110 basis points from the fourth quarter of 2017. Our effective tax rate decreased to 28.7% from 45.3% in the fourth quarter of 2017, primarily due to the enactment of the U.S. Tax Cuts and Jobs Act of 2017. Our consolidated net income for the fourth quarter was $15.6 million or $0.34 per fully diluted share compared to net income of $13.1 million or $0.27 per fully diluted share in the prior year quarter. Consolidated net income for the fourth quarter included the impact of a $6.5 million after-tax gain on the sale of real estate. Consolidated net income was also impacted by the aforementioned $6.7 million goodwill impairment charge in our Europe segment, which had no tax benefit. Now, turning to our balance sheet and cash flow. At December 31st, 2018, cash and cash equivalents totaled $160.2 million, a decrease of $8.3 million compared to December 31st, 2017. Our inventory levels as of December 31st, 2018 were up by approximately $23 million compared to the same period last year as we inventoried higher priced raw material compared to last year. We remain debt-free with only a small portion of capital leases amounting to $3.4 million. As a result of our strong sales and focus on working capital management, we generated approximately $160 million in cash flow from operations during 2018, an increase of nearly $41 million or 34% year-over-year. Capital expenditures were approximately $5.4 million for the quarter which included $800,000 of capitalized costs related to the SAP project compared to $12.9 million in the fourth quarter of 2017. For the full year 2018, capital expenditures were approximately $30 million, in line with our expectations. We remain committed to returning a minimum of 50% of our cash flow from operations to our valued stockholders in the form of share repurchases and dividends on an annual basis. We paid approximately $39.9 million in cash dividends during 2018 including $10.1 million in the fourth quarter. Over the past three years, we have returned over 90% of our cash flow from operations to stockholders. On January 28th, 2019, our Board of Directors declared a quarterly cash dividend of $0.22 per share. The dividend will be payable on April 25th, 2019, to the company shareholders of record as of April 4th, 2019. During the fourth quarter of 2018, we repurchased 970,093 shares of our common stock at an average price of $62.93 per share for a total of $61 million. In total for the year ended December 31, 2018, we repurchased and received 1.77 million shares of our common stock at an average price of $62.69 per share for a total of $111.1 million. We also received 182,000 shares of common stock as a final delivery of a $50 million share -- accelerated share repurchase program initiated in December 2017. As of December 31, 2018, we have repurchased approximately $234.6 million in shares under our $275 million share repurchase authorization which expired at the end of 2018. In December 2018, our Board of Directors authorized a new $100 million share repurchase authorization, which will remain in effect through the end of 2019. Given our confidence in our business and our expectation of the 2020 Plan will drive improved operational performance; we plan to continue to purchase additional shares of our stock. Before we turn it over the questions I'd like to discuss our 2019 outlook. For the full year of 2019, we are initiating guidance as follows

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Wojs with Robert W. Baird & Company. Please proceed with your question.

[Tim Wojs:]

Good afternoon, everybody.

[Karen Colonias:]

Hi, Tim.

[Brian Magstadt:]

Hi, Tim.

[Tim Wojs:]

I guess my first question, maybe just -- could you elaborate just a little bit on what you think stable growth means? Should we expect the rate to be kind of stable with Q4 levels, kind of, stable with 2018 levels? I'm just trying to kind of understand how the volume cadence kind of played out through the quarter and kind of what those volume numbers look like in January more explicitly, please?

[Karen Colonias:]

Yes. Tim, I think, we are still thinking that the starts are going to be in, again, low to mid-single digits. We would -- again, continue to reiterate, when you look at our business, very cyclical, very common for fourth and first quarter to be lower volume numbers and second and third quarter to be actually our largest numbers. So we had a December that was pretty low on a volume standpoint as we've mentioned. We've seen it come back in January, not only from just the price increase, but also we have seen organic volume growth in January. So a little early to tell what the year will look like, since we're in the first quarter and that's always a tough one when depending on what weather conditions are. But we're anticipating, again, that mid to single-digit growth on housing starts.

[Tim Wojs:]

Okay. And would you expect that to maybe be weighted more towards the second half kind of Q2 at all? I'm just trying to think through how you would expect that to kind of play out because it's actually me start a little down here in the first quarter.

[Karen Colonias:]

Yes. I mean, again, just based on weather conditions and what historically we've seen from our growth cycle second and third quarter always our largest periods of growth.

[Tim Wojs:]

Okay. And then when we think about just kind of gross margin and some of the modest improvement there you're expecting through the year, is there any sort of kind of cadence to kind of keep in mind on a quarterly basis? I mean, would your production levels be down at all maybe in the first half if you need to right size your sort of inventory? Or I'm just trying to think of I know the gross margins were a little stronger in the first half -- first three quarters of the year and obviously a little weaker in the fourth quarter, so just how should we think about gross margins as we go through the year?

[Brian Magstadt:]

Hi, Tim. It's Brian. I would expect that as we have a greater selling activity to support customers for the busier building season, we absorb more overhead during those periods. So, of course, second and third quarter typically traditionally are a little bit better. On the gross margin, all things being equal than first or fourth, again from a factory-absorption perspective. We've noted that it's a tight labor market and we're seeing that impact on our gross margin there particularly in the fourth quarter that was one of the elements there. But as we look at 2019, we would expect second and third quarter to be a little bit better than first and fourth again just from a volume perspective.

[Tim Wojs:]

Okay. Okay. And then I know you kind of reiterated the SG&A target for the 2020 Plan. Do you have anything kind of explicitly that you are targeting for SG&A whether it's growth or as a percent of sales for 2019 at all?

[Brian Magstadt:]

It's Brian again. So we would expect SG&A that's all of the elements of those to be approximately 27.5% to 28.5% of net revenues for 2019.

[Tim Wojs:]

Okay. Okay. So just kind of gliding towards that 26% to 27%? Okay. And then…

[Brian Magstadt:]

Correct.

[Tim Wojs:]

And then just last question, do you have any -- in the gross margin guidance, do you have any benefit from just kind of the moderation that we've seen in steel incorporated into that range?

[Brian Magstadt:]

Not necessarily. I mean, the way we're thinking about that is -- as we mentioned in the third quarter, due to availability, we increased our raw materials -- raw material and we’ll need to sell-through that. So that guidance that we've given is estimating that it will take us a while to work through, the current on-hand raw material, and then of course will be back in the market buying more throughout the course of the year. I'd say, it's a little early yet right now to specifically comment on your question there, but how we're looking at 2019 in that gross margin range is taking into account that growth that Karen had noted in addition to our current on-hand inventories.

[Tim Wojs:]

Okay. Okay. Great. I'll hop back in queue. Good luck on 2019.

[Karen Colonias:]

Thanks, Tim.

[Brian Magstadt:]

Thanks, Tim.

[Operator:]

Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

[Daniel Moore:]

Good afternoon, Karen. Good morning, Brian. Thanks for taking the question.

[Karen Colonias:]

Hi, Dan.

[Brian Magstadt:]

Hi, Dan.

[Daniel Moore:]

I wanted to try to drill down a little bit and get a little bit more granularity on gross margin in Q4, specifically North America, if we look at the roughly 400 basis point decline year-over-year. Can you give – is there any way to give a little bit more specifics in terms of impact of factory overhead on lower production and just absorption number one, number two, raw materials warehouse cost, number three, labor? If not to the basis point, maybe just kind of rank order so we get a little bit better sense of those moving parts?

[Brian Magstadt:]

Sure, Dan. This is Brian. I would say that, the factory and tooling as a percent of revenue was the highest. So, as we think about spend and absorption of that spend, so spend was up and – so with increased dollars and the volumes being what it was that one has the biggest impact. I'd say material, would be next, again as a percent of revenue, followed by direct labor and then our shipping and warehouse cost.

[Daniel Moore:]

Got it. Very helpful. And this maybe piggybacking on the last question, but as we think about the guidance, do you think it's reasonable to get back towards that lower end of your full year guidance range for Q1? Or is that more of a ramp as we get into the year given seasonality and maybe some of the weather related softness that you described?

[Brian Magstadt:]

Right. I would say that, it's – the year amount that we’ve – the year estimate that we put out there, we've not specifically broken out the individual quarters. But as I mentioned earlier, the first quarter is typically aren't going to be as good as – the first quarter wouldn't be as good as Q2 or Q3, and then again moderating on Q4. But we're looking at the annual for that range and haven't put out a Q1 gross margin guidance.

[Daniel Moore:]

Got it. And then lastly, the revenue job that you experienced in December, obviously well documented kind of softness – saw passion in anything housing related. But what have you heard from your customers in terms of explanations? Do you see them pulling back on inventory materially? Any sense of where they are in terms of those inventory levels, any color around that would be great?

[Karen Colonias:]

Yeah, Dan. This is Karen. It's tough for us to tell exactly from our customers on an inventory standpoint, as you know we can get products to our customers in the 24 to 48 hour timeframe. So, if they chose to pullback a little bit on inventory, they certainly know that we would be able to support them in January and maybe that's a part of what we're seeing. But again, because we're not engaged in their inventory, it's real tough get very precise on that. I think just a lot of the economic uncertainty that we saw especially in the November and December timeframe seems like it impacted all the building industry and we were certainly a part of that also.

[Daniel Moore:]

Got it. Thanks. I'll jump back in queue if I have any follow-ups. Thank you.

[Karen Colonias:]

Thanks.

[Brian Magstadt:]

Thanks Dan.

[Operator:]

[Operator Instructions] Our next question comes from the line of Steve Chercover with D.A. Davidson. Please proceed with your question.

[Steve Chercover:]

Thank you and forgive me, I was a little distracted on the call. But could you give us any geography locations where the housing activity really fell off in Q4 or in December as you said?

[Karen Colonias:]

Yes, Steve, that's an interesting question. As you now the housing perks are -- the numbers are not out because of the government shutdown, so we still don't have the December housing numbers. So, that's one thing that doesn't give us a good indication. The other thing I would just say from a standpoint of what we're seeing in the weather, certainly in the Western states, we're having a pretty significant winter this year. And that definitely started somewhere in the November-December timeframe. So, don't have anything specific on it and we'll have a little bit better information once that starts numbers come out. But it's real hard for us to really delineate anything specific in those regions. Again, we're kind of seeming what appears to be a normal fourth quarter-first quarter slowdown.

[Steve Chercover:]

But to be fair you don't really need the housing statistics from the government to know where you traditionally sell? So, I mean did you see it in Florida? Did you see it in California?

[Karen Colonias:]

Yes. I mean again as I mentioned we saw what would be our normalized slowdown that we would see in that fourth quarter timeframe and that's really a function of when weather hits.

[Brian Magstadt:]

Yes, I would think -- Steve, it's Brian, I would think that we should see some softness in the West housing starts and the South based on internal figures that we have here. So we are really interesting once those come out and see how the Census Bureau starts correlate, but I would say that should be again less than South issue.

[Steve Chercover:]

Okay. And the 8% organic growth that's embedded in your 2020 Plan, do you expect to see that this year? Or did the late 2018 pause give you concerns that that might not materialize in FY 2019 and I recognize you said things would snap back in January?

[Karen Colonias:]

Yes, as we look at that 2020 Plan, again, that's an 8% compound annual growth rate starting in 2016 and continuing through the end of 2020. We're tracking very nicely on that particular metric. Again as we talked about there's other elements that we're working on from that growth standpoint, the mechanical anchor line that we're looking to introduce in Home Depot that's not really tied to us, the housing start number; the work that we're doing in Europe to roll out our fastener line in Western Europe and then our connector line in the Nordics. So we have some elements definitely of that 8% CAGR that are not associated just with housing start number.

[Steve Chercover:]

Okay. And then finally, since I'm not invited or I don't attend, but there's a big housing show I believe in Las Vegas every year I think it's coming up and I'm just wondering if you have any new initiatives to propel the trust offering that will be more prominent this year than the years passed.

[Karen Colonias:]

Yeah, so the Las Vegas show that's International Builders Show. That's coming up in two weeks, I think in Las Vegas. Definitely the show where we showcase our trust offer that happens at the Component Manufacturing Show and that one's in October. At the Builders Show, again we tend to showcase any new products that we have whether it be in our fastener line or carbon fiber or connectors, but that's not really an emphasis on the trust software that's -- again that was that in October. That was a very successful show that we just had in October with Building Components, showed our products, our trust offering, our software to a significant number of component manufacturers, and are getting some good results with those that are interested in converting to our program in the next few months.

[Steve Chercover:]

Okay, and I guess final question forgive me. I love to see the repo, give us a great message to the shareholders and a good disciplined return, significant part of your excess cash. Has there been any thought given to – inserting more nuance into how you actually do it? I mean, my gut says your stock might be a little bit weak tomorrow, is it kind of on autopilot? Are you trying to get more dialed in as you become deeper into this initiative after several years?

[Brian Magstadt:]

Steve, its Brian. So on that I would say that we've used a couple of mechanisms to do share repurchases. We've used accelerated share repurchases, we've used 10b5-1 plans, of course, those need to be initiated during open trading window periods. So yes we'll be looking at trying to achieve that 50% return to shareholder goal throughout the year, and we'll provide more updates as we get further along the year. As it relates to the dividend we've -- the board typically looks at --- well, they've discussed -- we discussed capital allocation throughout the year, but in over the last few years the board has typically increased the annual -- the quarterly dividend on an annual basis at their April meeting and we'll discuss that along with share repurchase levels. As we noted there's $100 million authorization for 2019 and we'll see how that -- we'll see where that -- those take us throughout the course of the year.

[Steve Chercover:]

But just to clarify, the board does have an intrinsic sense of the enterprise value or the -- yes, I guess the enterprise value that is incorporated into the capital allocation decision?

[Brian Magstadt:]

Correct.

[Karen Colonias:]

Yes.

[Steve Chercover:]

Okay. Thank you, both.

[Brian Magstadt:]

Thank you, Steve.

[Operator:]

Our next question comes from the line of Julio Romero with Sidoti & Company. Please proceed with your question.

[Julio Romero:]

Hey, good afternoon. Thanks for taking the questions.

[Karen Colonias:]

Yes.

[Brian Magstadt:]

Hello, Julio.

[Julio Romero:]

So can you talk a little bit more on the European segment and what caused those lower sales volumes? I think I might have heard you mention, there were elevated sales in the prior year quarter, so if you can elaborate on that at all?

[Brian Magstadt:]

Sure. So part of our European business, our Concrete business over there has products, carbon fiber products for potentially large jobs. So asphalt paving products, runways and the like and got some large jobs in Q4 of 2017 that we didn't have at the same level in Q4 of 2018. So not that the entire European businesses is this large job-based business, but there is a bit of that impact, European Concrete business related to larger projects, that sales are recognized when those projects are being conducted. So sometimes there's a bit of a timing issue on the comparability.

[Julio Romero:]

Okay. And then just, I think, we've spoken about this before, but can you just talk about again how building maybe above code, resiliency can be a driver for you guys in the long term? And how should we think about maybe best guesstimate for a repair and remodel as a percentage of sales?

[Karen Colonias:]

Sure. I think, we've talked about the codes. Again, there's one national code and you've required to design to that as a minimum standard. They recently typically will put more content in the structure when it's on the West Coast or anywhere along the coastal areas, it's due to the earthquake or high-wind requirements. The codes are looking at potentially designing to something called resiliency versus life safety. And I think there was a really nice example of that when Hurricane Michael hit Mexico Beach. I think many people have seen this one house was standing called the Sand Palace that was built to about a 50% higher than standard building code practices, basically it was able to withstand a Category 5 hurricane. So a lot of interest about being able to build to resiliency versus life, just to life safety, what would it cost, what would it create? When you think about code change, I think that's a change in the positive direction, because what you see is entire communities devastated. There are no houses, there are no schools, there are no jobs to come back to. So this concept of maybe changing those design standards is an interesting conversation that's occurring. And as I've mentioned, when you think about code changes, typically they take many, many years to enact. It is quite interesting that people are starting to talk about this and then they actually have a proof-of-concept in this house that survived that Category 5 hurricane. So certainly, it would be interesting, where we will stay on top of that, but that is not a near-term code change. My guess is you’re 7 to 10 years out before someone would be willing to adopt those code changes.

[Julio Romero:]

Helpful. And just on repair and remodel, I mean, I think what would kind of be a fair range of what would that be as a percentage of sales?

[Karen Colonias:]

Yes. We are -- as we’ve mentioned in the past, tough for us to give a specific number. We're certainly working on trying to get a better handle on that. And the real reason is again the same products can be used in new construction as well as repair and remodel and they go through the same distribution channel. Obviously, we have some products like our Outdoor Accents, that's really a repair and remodel type of project so we can track a few products, we can track a few types of distributors, but we're definitely working on getting a handle around better ideas of how much of the business goes to repair and remodel. As we've brought the fastener line in, I think that's been able to expand that opportunity in repair and remodel. So I don't have a specific number for you, but definitely we are putting more products that go into that consensus and house additions, the garage organizers, cargoloads all those sort of things.

[Julio Romero:]

Okay, fair enough. Appreciate, you taking the questions and good luck in 2019.

[Karen Colonias:]

Thank you.

[Operator:]

Our next question is a follow-up from Daniel Moore with CJS Securities. Please proceed with your question.

[Daniel Moore:]

Thank you again. And I apologize if this was asked in a different form previously. But just – Karen as it relates on your comments about January's demand being described as strong. How does that dovetail with the expectation for kind of that low-to-mid single-digit growth in housing starts for the year? Is that level of more kind of stable flat just what are you seeing so far in the quarter?

[Karen Colonias:]

Yes. And again, it's always difficult to pick a quarter based on one month. But we definitely saw organic growth in January at a fairly decent pace. Will it continue? Hard to tell again, we're February 4th or something here. And it's also hard to know on that, January was that some filling of warehouses. As we mentioned that’s real tough for us to see from a distributors standpoint, but definitely the January increase is not just based on the price increase. There is definitely organic growth in that January number.

[Daniel Moore:]

Perfect. Appreciate it again. Thank you.

[Karen Colonias:]

Okay, thanks Dan.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.